Zhong Wang

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Aluminium is used to support everything from skyscrapers to young saplings. Can it also help prop up banks’ equity capital markets desks? Bookrunners for China Zhong Wang, Asia’s biggest maker of aluminium extrusion products and the world’s first $1bn-plus initial public offering since August, certainly hope so.

Early signs are good. On Monday they set a gung-ho price range, which could see Zhong Wang raise up to $1.6bn. Markets seem welcoming, with the FTSE All-World index up by 28 per cent since its March low. On the Hong Kong market, where Zhong Wang will list, daily turnover has, meanwhile, risen by a fifth. Recent listings on big exchanges have been tiny but performance has been encouraging. Language software provider Rosetta Stone has risen 57 per cent since its New York debut.

Zhong Wang’s pitch is hitched to China’s near-$600bn economic stimulus package. The group makes parts for railcars and tracks, which should benefit from Beijing’s transport spending splurge. Business is almost wholly domestic and a third of its revenues accrue from trains, so state entities mainly write the cheques. Net income basically doubled in the year to 2008 to $280m.

But there are risks too. Supply of the most abundant metallic element in the earth’s crust may not be a problem, but pricing is. Once existing supply contracts expire, Zhong Wang could find itself on the hook for pricier aluminium for at least some of its products. Gross profit margins, at 42 per cent, will be tough to sustain. And the bookrunners’ ability to corral cornerstone investors for the IPO – typically, local tycoons who lend support by agreeing to lock-in periods – has evaporated, thanks to volatile markets.

At the mid-point, Zhong Wang is priced at 12 times this year’s earnings. Comparable companies are few, but Singapore-listed Midas Holdings offers a smaller, more diversified proxy, at 11.5 times. As support for rickety structures goes, Zhong Wang’s IPO looks about as stable as the bamboo scaffolding favoured by Hong Kong developers, and not as cheap.

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